Morning Report

May 17, 2022

“The US dollar index has dropped from the 20-year peak levels it reached last week, with the global economy in focus after weak economic data from China fuelled concerns of a global slowdown – trading in the dollar is muted whilst investors await US retail sales data and a public appearance from Fed Chair Jerome Powell, both scheduled for today.”

Tim Hallinan – Trading Director

Main Headlines

The Biden administration is increasingly feeling it has little control over short-term inflation, officials say, and is looking for ways to offset the political risk from price hikes in the months leading up to November’s elections. Data last week showed inflation still at 40-year highs, but slightly off an earlier peak. The economy and Biden’s handling of it are top issues for voters, and lowering the cost of meat, gas and other household staples is a key way Biden and his fellow Democrats could defend control of Congress in November’s midterm elections, strategists say. But any US president’s ability to cut prices in the short run in global markets for products from oil to grains is limited, White House advisers say. Influence over supply chain bottlenecks related to China’s COVID shutdowns and Russia’s invasion of Ukraine, both driving up prices, are even further out of reach, they say. The administration expects inflation to ease further from its recent breakneck pace as the year progresses, but not to a level that would be deemed acceptable.

Britain’s unemployment rate fell to its lowest since 1974 in the first three months of this year, but soaring inflation led to the biggest annual fall in real earnings excluding bonuses since 2013, official figures showed today. The jobless rate dropped to 3.7% from 3.8% and the 1.257 million people out of work was less than the 1.295 million job vacancies on offer for the first time on record. The Bank of England is watching the strength of Britain’s labour market warily, as it fears that higher-than-normal pay growth is a key channel through which the current energy-driven surge in inflation might become entrenched. Total pay in the first quarter of 2022 was up 7.0% on a year earlier – far above economists’ average forecast of a 5.4% rise – while regular pay excluding bonuses rose only slightly more than expected, up 4.2%. Adjusted for inflation, regular pay was 2.0% lower than a year ago, the biggest fall since the three months to September 2013. Governor Andrew Bailey has said a fall in living standards is inevitable due to the energy price shock.


Sterling is well bid against most major currencies overnight. Bank of England Governor Andrew Bailey said yesterday that the current surge in inflation was the central bank’s biggest challenge since it gained independence in 1997 but denied that policymakers had been “asleep at the wheel”. Bailey has been criticised for failing to act sooner on inflation by some lawmakers from the ruling Conservative Party, which is under public and political pressure over a cost-of-living crisis. While in December the BoE became the first major central bank to raise interest rates since the start of the pandemic, this did not stop a surge in inflation which hit 7.0% in March and is forecast to have reached a 40-year high of 9.1% in April. Britain’s energy regulator Ofgem said on Monday it plans to review a price cap on consumer bills every quarter rather than twice a year to reflect the volatile price swings in the market and help prevent more suppliers from going bust.


The euro is stronger against the dollar and weaker against sterling this morning. The International Monetary Fund called on nations to provide grants and donations to fill a $5 billion monthly financing need for Ukraine after Russia’s invasion, while signalling that more of the institution’s own lending will need to wait for when there is more stability. The IMF approved a $1.4 billion emergency loan for Ukraine to bolster the nation’s economy last month. The European Commission is hoping to jumpstart a large-scale rollout of solar energy and rebuild Europe’s solar manufacturing industry. The plan to install solar panels on all newly built public buildings is part of its bid to wean countries off Russian fossil fuels. On the oil embargo, there was no breakthrough at the EU foreign ministers’ meeting yesterday, with Hungary demanding up to €18 billion to cover their transition and adjustment from Russian oil to alternative energy sources.


The dollar is weaker than most major currencies in the early morning trade. Value stocks are providing investors some shelter from the storm sweeping markets, as portfolio managers seek out bargains and dump high-flying companies that have been in vogue since the wake of the financial crisis. The renaissance started over a year ago, but the so-called value factor’s powerful rise in 2022 has reinforced belief that this is now a durable shift in market conditions. Nick Kirrage, co-head of the global value team at London-based asset manager Schroders, said that the valuations of growth stocks had become so overstretched that an eventual reversal was inevitable. The White House said it has released $110 billion in funding from the $1 trillion infrastructure package that seeks to fix crumbling roads, expand broadband internet, and improve the electrical grid. Two top US defense intelligence officials are due to testify on Capitol Hill about what the government knows of unidentified flying objects, in the first public congressional hearing concerning UFOs in more than 50 years.


Stocks in Europe rose Tuesday along with US equity futures as some semblance of risk appetite returned to markets roiled by concerns about global economic growth, surging prices, and policy tightening. Travel and basic resources led a broad-based advance of the Stoxx Europe 600, setting the gauge on course for a third day of gains. Contracts on the S&P 500 and Nasdaq 100 bounced back after a Wall Street drop. Treasury yields rose and the dollar retreated. Bond yields across Europe jumped, with the 10-year UK rate surging 10 basis points after data showed a decline in average earnings, intensifying a cost-of-living squeeze. A challenging global economic outlook amid elevated food and fuel costs and tightening monetary settings continues to shape sentiment, although one bond-market measure – the five-year breakeven rate – is signalling inflation may have peaked. Oil has jumped to about $114 a barrel and an index of agricultural prices is at a record high.

Main Economic Data/Central Banks/Government (All Times CET)

7:30 a.m.: France 1Q ILO unemployment rate
8:00 a.m.: UK April payrolled employees, jobless claims; March weekly earnings
10:00 a.m.: Italy March Trade
11:00 a.m.: Italy April CPI
11:00 a.m.: Euro-area 1Q GDP
11:00 a.m.: UK to sell bonds
11:15 a.m.: Switzerland to sell bills
12:05 p.m.: BOE’s Cunliffe speaks
12:30 p.m.: ESM to sell bills
1:15 p.m.: Riksbank’s Ohlsson speaks on monetary policy in wartime
2:00 p.m.: Fed’s Bullard speaks
2:30 p.m.: US April retail sales
3:15 p.m.: Fed’s Harker speaks
7:00 p.m.: ECB’s Lagarde speaks
8:00 p.m.: Fed’s Powell speaks at WSJ’s Future of Everything conference


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